Entering a One-year SaaS Contract with No Renewal
Q: I just bought your product – it is very impressive, but I have some things I do not follow. I need to create a SaaS model where customers only get to use it only once for one year. There will be a 12-month contract with payment in advance so I need to have a deferred revenue account. How do I enter the proper assumptions to ensure it is capturing a non-recurring 12-month contract that is all paid up front?
A: That is very easy to model. We did a quick example for you with these inputs for one offering: $120 annual pricing, being recognized as $10/month with the rest deferred properly.
With only a few inputs as follows, our model does all of the heavy lifting for you:
1. Type and Length of Sale - Enter as a "Monthly Recurring" sales model with a 12 month Length of Relationship and a Renewal Rate of 0% as shown:
2. Pricing and Revenue Share Assumptions - Enter $10/month as the monthly price and select "Billed annually and collected in advance" as your Billing option (out of the 12 billing options available - see this blog post for more on billing options and the AR and cash impacts):
3. We input just one customer in the first month in the Sales Assumptions so you can see how it models out:
With those few, simple inputs, the calculations in the model automatically do everything else for you.
Let’s take a look at what happens:
Here’s how the Sales detail report looks when we open it up to the monthly view and drill into that same offering. We see the one customer for 12 months and then ending so there are no customer or recognized revenue a year later (we didn’t model any expenses, so GM is 100%)...
...and scroll further down in the same view to the Revenue Summary and you can see the Cash of $120 received in the first month and the $110 of Deferred Revenue in the first month and you can see that declining over time:
The Income Statement, Balance Sheet, and Cash Flow Statement will also all properly reflect the assumptions above.